A famous saying goes, “a good plan is half work done,” yet, financial planning remains an alien subject in India.
As per a SEBI report, only 27% of Indians are financially literate, and this statistic unearths many questions we’re blissfully oblivious of.
How to plan your finances?
How to save for your retirement?
And,
How to plan your taxes? These are the questions that beg to be answered TODAY.
In this “guide to personal financial planning”, we’ll answer all these questions and a few other crucial ones.
| Topics discussed: 1. What is Financial Planning, and Why is it Important? 2. How to Plan Your Finances? a. Setup a Comprehensive Budget b. Clear Your Debts c. Build an Emergency Fund d. Diversify Your Investments e. Take Insurance Seriously f. Prepare for Your Taxes g. Plan Your Retirement 3. Review Your Financial Plan Annually. |
What is Financial Planning & Why is it Important?
At the bare bones of it, financial planning is when your financial situation is evaluated, and a strategy is created accordingly. This strategy involves planning your short and long-term financial goals, budgeting, saving, taxation, and others.
A comprehensive financial plan includes investing your money, debt repayment, insurance, and also your retirement plan. Furthermore, financial planning also includes strategies for buying properties, education expenses, and others.
Planning your finances is vital because:
1. It removes financial uncertainties from the equation.
2. Allows you to be better prepared for emergencies.
3. Gives you the confidence to make the best life decisions.
4. Avoids debt traps.
5. Secures you from inflation and recessions.
6. Improves standard of living.
7. Makes dreams come true.
Now that you know the profound reasons for a financial plan let us see how to plan one.
How to Plan Your Finances?
Setting up a financial plan is like constructing a house. You start with a plan, build the foundation, then the walls, and finally the ceiling. The planning phase begins with a budget.
Setup a Comprehensive Budget
Setting up a budget is simple but ensure to include all your expenditures for the month without omissions. Make a note of your income for the month, then all your expenses, and subtract expenses from your income. This must give your monthly budget; ideally, your income must be more than your expenses.
If your expenses exceed your income, address this issue by cutting down nonessential expenses and creating other means of income.
Extraneous expenses include unused OTT subscriptions, switching from post-paid to prepaid cellular plans, eating at home, taking public transportation, paying off small debts, etc.
You may create other means of income by freelancing, entertaining the gig economy, finding a way to earn passive income, and undertaking side hustles that fall within your wheelhouse.
Clear Your Debts
Trying to save money without clearing your debts is like trying to fill a bucket with a hole. Unless you are prudently paying EMIs or installments, outstanding bills not only hinder your financial plan and delay it indefinitely.
Begin by deciphering your highest interest debts which most often are Credit card debts and other debts that demand over 10% interest rates. Focus on clearing these first, which also prevents interests from compounding.
Secondly, shift your focus to clearing low-rate debts like automobile, student, and personal loans.
Banks and other services often offer various ways to clear debts in installments or one-shot payments upon request.
Once your budget is set, and you’re debt-free, an emergency fund is the foremost savings to focus on.
Build an Emergency Fund
An emergency fund is a dedicated amount set aside to be used during unexpected life events. Also known as a contingency or a rainy day fund, this saved amount can be utilized in case you lose your job or have medical emergencies.
If you’re wondering how much you should save for your emergency fund, experts recommend a method to calculate it.
An emergency fund is usually between three to six months of your monthly expenses. For instance, if your monthly expense is Rs. 50,000, your emergency fund must be a minimum of Rs. 1,50,000 to a maximum of Rs. 3,00,000.
If you have dependent parents or children to support, it pays to save an emergency fund for them separately or add to the calculated number above.
Find a high-yield savings account in a bank that doesn’t charge exorbitant withdrawal charges to hold your emergency fund.
Diversify Your Investments
The next step is to start investing, and these are some of your options to start off.
- Fixed Deposits – Low-risk options to save larger sums of amount.
- Recurring Deposits – Where you can save each month for a specific time.
- Mutual Funds – Where investing in an entity that diversifies your assets.
- Public Provident Fund (PPF) – It is a Govt. of India-backed long-term savings option where the lock-in period is 15 years.
- Employee Provident Fund (EPF) – It is the retirement savings option for salaried individuals.
- National Pension Scheme (NPS) – It is the retirement pension scheme also backed by the Govt. of India.
These are some of the traditional means of investing and now let’s look at some nontraditional ones you may consider investing in the short or long term,
1. Stocks
2. Bonds
3. Exchange-traded funds (ETFs)
4. Real estate investment trusts (REITs)
5. Commodities
6. Options
7. Futures
8. Forex
9. Cryptocurrency
Based on your age, income, responsibilities, existing financial liabilities, and assets, a CA or a financial planner professional recommends the best options for you.
Take Insurance Seriously
Insurances are more than just a means to save on your IT returns; they’re life savers. The right insurance, especially for older individuals, can save your money in lakhs in times of emergency.
- Life insurance
- Health insurance
- Motor insurance
- Travel insurance
- Property insurance
- Business insurance
- Liability insurance, and others.
As there are numerous insurance options below to choose from, consulting a financial expert is a must.
Prepare for Your Taxes
It is imperative to plan your taxes at the beginning of every fiscal year instead of scrambling just before filing your tax returns. A well-executed tax plan reduces liabilities immensely, and you may also consider investing in government schemes to reduce tax liabilities.
Insurances, mutual funds, and home loan interests are some areas recommended for tax deductions. Yet again, consulting an expert and being steadfast can save substantial money.
Plan Your Retirement
Regardless of how old you are, planning for your retirement is a must. Start by planning & deciding how much you want to save for your retirement, the lifestyle you want to live after retirement, and when you plan to retire.
Compounding interests, FDs, and other long-term investments help you plan your retirement.
PPF, NPS, and others also help you save for your retirement, and you may either use an online retirement calculator or hire an expert to plan your retirement thoroughly.
Review Your Financial Plan Annually.
Lastly, review your financial plan once a year. Starting from the monthly budget to your retirement, various factors may change your financial plan, and reviewing it annually helps.
Promotions, additional EMIs, getting married, having a child, and various other lifestyle changes may deviate from your financial plan, and it pays to be prepared for it.